Dollar hits 2-year high on German, Italian reports

Trader positioning flat; analysts mull Japanese remarks

By

DeborahLevine

V.Phani Kumar

NEW YORK (MarketWatch) — The U.S. dollar extended gains on Tuesday, pushing the euro to a two-year low, after a German court and Italy’s prime minister added to uncertainty about the euro-zone’s rescue fund.

The dollar index
DXY, +0.52%
which measures the greenback against other global currencies, rose to a two-year high during the session and lately traded at 83.377, up from 83.165 in North American trade late Monday.

Italy’s prime minister Mario Monti said he couldn’t rule out the country needing to tap the region’s bailout fund in the future, according to Dow Jones Newswires.

And Germany’s Federal Constitutional Court, which heard arguments regarding a challenge to the country’s participation in funding the permanent European Stability Mechanism, reportedly said the ruling could take up to three months. A decision wasn’t expected on Tuesday, but the ESM was supposed to become operational on July 1.

“The markets are extremely jittery and are willing to react negatively to any sign that the European authorities are unwilling to work together (and at a fast pace) to “save” the euro zone,” Kathleen brooks, research director at Forex.com, wrote in emailed comments. “This leaves the euro at risk of one step forward, two steps back.”

The Eurogroup of euro-zone finance ministers, which met until the early hours of Tuesday morning, announced an extension of Spain’s deadline for containing its fiscal deficit, with €30 billion made available to assist Spanish banks by the end of this month. Read story on Spain.

“Despite these developments, the euro is the worst performer today,” said Christopher Vecchio, a currency analyst at DailyFX “Again, it appears that the measures agreed upon at the euro-zone finance minister’s meeting have been deemed insufficient.”

Until early U.S. trading hours, the euro was up after a round of stronger-than-expected data from Britain and as Spanish government bond yields retreated.

Spanish 10-year government bond yields retreated after poking above the 7% level on Monday. The 10-year yield (10YR_ESP) declined 0.28 percentage point to 6.73%, according to electronic trading platform Tradeweb.

“Sentiment improved markedly at the start of European dealing as [a] drop in bond yields and surprisingly robust economic data out of the U.K. helped spark a short-covering rally,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

The British pound
GBPUSD, -0.4752%
slipped modestly to $1.5511, from $1.5518 late on Monday.

Analysts at Citi noted that traders seem to be limiting exposure to overly short or long positions, keeping currency pairs in tight ranges.

“The overall picture is one of light conviction,” said Todd Elmer, a currency strategist at Citi. “This should hardly be surprising as questions on Europe continue to mount and there is increased uncertainty as to the timing and magnitude of the U.S. policy response to ongoing slowing. Since clarity on these issues is unlikely to be forthcoming, we continue to see little incentive for investors to build larger positions.

“This lack of ammunition likely goes some ways to explaining why recent ranges have been so difficult to break and we are not convinced a shift in this pattern will materialize in the short term,” he said.

Japan’s ‘strong steps’

Against the yen, the dollar
USDJPY, +0.15%
pared losses to ¥79.44, compared with ¥79.59 Monday. The dollar traded as low as ¥79.18, according to FactSet.

The head of the Bank of Japan was quoted as vowing to continue “strong” steps aimed at shaking the nation out of its deflationary state.

“We have accumulated up to ¥54 trillion ($681 billion) of asset purchases so far, but we are aiming for ¥70 trillion and through the accumulation of another ¥16 trillion in assets we believe the impact of monetary easing will be further enhanced,” Bank of Japan Gov. Masaaki Shirakawa said Tuesday, according to a government official. Read about the BOJ chief’s comments.

The remarks were made in a government meeting and come ahead of a two-day BOJ policy meeting that begins Wednesday.

Data released Tuesday by Chinese customs authorities showed that while the country’s June exports growth exceeded expectations, the 6.3% increase in monthly imports fell short of expectations. Read full story on the Chinese data.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.